The time for comments to the emergency regulations has come and gone. Our team has prepared and submitted our comments. It’s important to briefly share the three points most relevant to our clients: (1) ownership rules, (2) the definition of priority, and (3) the regulation of terpenes (aka “terps”).
Some ownership rules apply only to LLCs. Why?
First and foremost, Greenspoon Marder Senior Counsel, David Frankel, spotted the odd regulation that all members of LLC (limited liability companies) are considered “owners,” and require the full panoply of disclosures, background checks, and so on, even if they are not participating in the management of the company and receiving less than 20% of the company’s profits. Consider, however, that shareholders in a stock corporation are not considered owners if they receive less than 20% of the company’s profits, and are thus subject to less stringent rules. Although our team is finding the stock corporation with an “S corp” designation to be the most workable company for small cannabis businesses, many if not most, of the newly emerging small businesses are converting to LLCs. As such, LLCs should not have more burdensome requirements than other types of companies, so we asked the agencies to limit the “ownership” rules only to those LLC members who are participating in the membership and control of the business.
Who gets priority if an MBC or Cooperative merges with a for-profit entity?
Secondly, the agencies will give “priority” licensing if an applicant operated in compliance with the Compassionate Use Act of 1996 and its implementing laws before September 1, 2016. There are many applicants who were operating in the form of nonprofit mutual benefit corporations or cooperatives as of September 1, 2016, but who now want to convert to a for profit corporation or LLC. Under the MBC merger statute in CA Corp. Code Section 8010, an MBC can merge with a domestic corporation or other business entity. Under the corporate rules, the new for-profit company is supposed to get “all rights and property” of the old company, so we asked the agencies to make it clear that these new for-profits enjoy the priority status earned by the old company.
What’s up with terpenes?
Our final note relates to the regulation of terpenes, as the new regulations barely mention this type of activity, which is a pretty big deal right now. Terpene businesses would usually fall into the category of Type 6 or Type N, depending on whether the terpenes are considered cannabinoids for purposes of the definition of “Extraction” in Section 40100. Most terpene manufacturers use steam distillation, which is a nonvolatile mechanical process. The distillation equipment can be installed permanently in a licensed premises but can also be installed on a vehicle so that the terpene manufacturer is able to distill terpenes from fresh cannabis plant material at or near the cultivation site. The regulations are silent concerning mobile terpene distillation equipment and operations. In addition, the regulations have been developed to address public health and safety issues related to cannabis products that are intoxicating or which involve potentially dangerous manufacturing processes. We respectfully suggest that the department develop regulations that are better suited for terpene manufacturers and also that permit mobile terpene operations at licensed cultivation sites.